What is illicit trade?

What is illicit trade?

A multi-billion dollar criminal enterprise

Illicit trade is a serious and growing threat to society. Through smuggling, counterfeit and tax evasion, governments are losing billions in lost tax revenues, legitimate businesses are being undermined, and consumers are being exposed to poorly made and unregulated products.

According to the United Nations Office on Drugs and Crime transnational organized crime is a USD 870 billion a year business.

It’s not just luxury goods that are counterfeited or smuggled and sold illegally. Medicines, cosmetics, toys, electronics and cigarettes can be widely found on the black market. In fact, anything in high demand is attractive to counterfeiters and smugglers.

Cigarettes are among the most illegally trafficked goods in the world. The global black market for tobacco products is large and growing. The value of the illicit tobacco trade is estimated to be greater than the illicit trade in oil, wildlife, timber, arts and cultural property, and blood diamonds combined.

Reports suggest illicit trade in tobacco represents 10 to 12% of global tobacco consumption, with an estimated illicit volume of up to 600 billion illegal cigarettes.

Criminals are increasingly attracted to the high profits and minimal risks associated with trafficking illegal cigarettes.

Illegal tobacco trade falls into four categories:

Illicit Whites – the ‘termite’ brands

Over the last decade a new form of illegal tobacco product known as “illicit whites” or “cheap whites” has emerged as a growing problem in several countries around the world.

In less than a decade, across the world, large scale smuggling of so-called “illicit whites” has increased exponentially.

Brands manufactured legitimately in one market, either taxed for local consumption or untaxed for export, and sold knowingly to traders who transport them to another country where the products are sold illegally without domestic duty paid.

In the European Union alone, illicit whites’ share of the total illicit tobacco trade jumped from 4.3% in 2007 to 33.9% in 2016, according to the latest KPMG SUN Report.

Illicit Whites Prevalence 2015

Growth of Illicit Whites - the Termite Brands

According to INTERPOL, illicit whites are known to be manufactured in Belarus, Vietnam, Indonesia, Philippines, India, Cambodia, Paraguay, Ukraine, Russia, UAE, Kenya and a number of Free Trade Zones (FTZs).

What makes the illicit whites problem especially difficult to tackle is that these products are usually legally produced, but illegally sold in destination markets avoiding tax and funding organized crime. Trafficking illicit whites is increasingly attractive for criminals as they can generally avoid the risks of prosecution for trademark infringements that counterfeiters face.

As manufacturers of illicit whites are able to operate legally within a country, they have fairly sophisticated facilities where they are able to produce cigarettes of a higher quality than counterfeits. They can also avoid the litigation associated with counterfeiting activity.

[…] today's market sees an ever-growing share of non-branded cigarettes ("cheap whites"). According to Member States' seizure data from 2013, 8 of the 10 most seized cigarette "brands" were "cheap whites". Of the more than 600 million cigarettes seized with support from OLAF in 2015, almost all were cheap whites.

Source: European Commission (2016) “ Technical assessmentof the experience made with the Anti-Contraband and Anti-Counterfeit Agreement and General Release of 9 July 2004 among Philip Morris International and affiliates, the Union and its Member States”.

In Canada, criminal networks have found a way to circumvent the lawful market using native reservations as manufacturing plants. The price gap created by the reserve hubs, which are benefited by tax breaks creates a tempting opportunity to smuggle terminate brands into the Canadian domestic market. Under section 87 of the Indian Act the personal property of First Nation Status people living on First Nations reserves is exempt from certain taxation. As a result, they are exempt from Provincial taxes on tobacco, apart from federal excise tax.

The Canadian authorities have stated that between August 2014 and March 2016, more than two million kilograms of tobacco were illegally imported into Canada. Taxes eluded amount to about CAD 530 million. It is estimated that this illegal operation generated CAD 20 million to the criminal organization.

In March 2016, a mammoth cross-border operation called Project Mygale involved more than 700 US and Canadian police and customs officials in 6 different countries on three different continents (South America, North America, Europe. The authorities searched 70 businesses and homes in and around Montreal, the Laurentians, Lanaudière, the Montérégie. About 60 people were arrested and according to reports, during the investigation officers seized:

More than 52,800 kg of tobacco, valued at CAD 13.5 million.

More than CAD 1.5 million in cash from illicit transactions in Canada.

Almost USD 3 million in cash.

836 kg of cocaine.

21 kg of methamphetamines.

100 g of fentanyl.

15 kg of cannabis.

There are multiple menaces associated with these termites. These products not only lead to tremendous tax revenue losses for governments, but they also pose a security risk. As seen from the results of Project Mygale, they are often smuggled via the same routes as other illegal goods, like weapons or drugs, and consequently benefit the same criminal organizations.

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